How to Prepare Schedule C, Part III, Cost of Goods Sold

If you are a Sole Proprietor, you must file Schedule C, Profit or Loss From Business (Sole Proprietorship). And if you are a Sole Proprietor whose business involves sale of a product, you must complete Part III of Schedule C, Cost of Goods Sold. The purpose of this article is to help you with this all-important task, because it is likely that Cost of Goods Sold is one of the largest expenses (if not the largest expense) in your business.

Part III of Schedule C begins on Page 2 of Schedule C, starting with Line 33 and ending with Line 42. Here's a "line-by-line" description of how to fill out each line.

Line 33. This is an information line, labeled "Method(s) used to value closing inventory". There are three choices: a) Cost; b) Lower of cost or market; c) Other. My advice is to use optio
"a" - Cost. The "closing inventory" (aka "ending inventory") is the value of any product you have remaining on hand at the end of the year. In other words, it represents what you bought that hasn't yet been sold. You will put the dollar amount of ending inventory on Line 41, so more about this in a moment.

Line 34. This is another information line. It's a "yes or no" question: Was there any change in determining quantities, costs, or valuations between opening and closing inventory? My advice: always answer this question with a "No." As long as you remain consistent from year to year and always value your ending inventory at your cost, you can answer this questio
"No" and move on.

Line 35. Inventory at beginning of year. If this is your first year in business, this will be zero. If this is not your first year in business, this amount will be the amount from Line 41 of your previous year's Schedule C.

Line 36. Purchases less cost of items withdrawn for personal use. Let's break this down into two parts: 1) Purchases. That's easy. Simply add up the cost (at your wholesale cost, not the retail price you intend to sell it) of all your product which was bought during the year. If you didn't use any of these products yourself, you're done. Just put that amount on Line 36. But if you did happen to take some of your product and use it yourself, then the second part of this description comes into play: 2) less cost of items withdrawn for personal use. If you have any product that was withdrawn for personal use, you must subtract that amount from the total amount of product purchased and enter the difference on Line 36.

Line 37-39. Most Sole Proprietors who sell product don't have anything on these 4 lines. These lines are typically used by manufacturers who must report the cost of labor expense (Line 37), Materials and supplies (Line 38), and Other costs (Line 39) directly related to the manufacture of their product. If you are not a manufacturer, just ignore these 3 lines.

Line 40. Add lines 35 through 39. Yup, just do what it says. This will give you the total of all your product costs.

Line 41. This is your ending inventory. Add up the cost (again, at your wholesale cost, not the retail price your customers pay you) of all product on hand at the end of the year.

Line 42. Cost of goods sold. You simply subtract Line 41 from Line 40 and Voila! You've calculate the cost of the product actually sold during the year. Now take this Line 42 amount and transfer it to Line 4.